Troubled fintech company PayPal Holdings (PYPL 2.90%) has slowly lumbered from the depths of its 52-week low near $50 to the mid-$60s, a nice little move for investors who managed to buy near the lows.
But zoom out, and you see a trail of pain and red ink. The stock is still down tremendously from its former highs from years ago. There are a lot of unknowns surrounding the company right now. The new CEO, Alex Chriss, is trying to bring the business back to relevancy.
Is it too late to buy PayPal stock? No, the comeback story is just getting started.
Here is what you need to know.
1. The company is very much alive
PayPal is one of the first fintechs. The company's story goes back to the late 1990s. However, the payments industry is super competitive, and PayPal seems to have lost its magic. It bolted on acquisitions over time, but investors grew impatient with the company's lack of innovation.
It may be a stale company, but it's very much alive. The company is still generating over $4 billion in annual cash flow and has more cash on the balance sheet than it does debt. Financially speaking, PayPal is in great shape:
PYPL Free Cash Flow data by YCharts
Active users declined by 2% year over year in the fourth quarter, but monthly active users increased by 1% to 224 million. Monthly active users will be where investors want to focus moving forward. There are 426 million total active accounts today, so the question is how many of those 202 million non-monthly users it can get to engage more frequently.
2. New product focus looks promising
Alex Chriss seems to be focusing his early attention on this. In Q4, the company outlined a strategic priority of growing its branded checkout product. Additionally, PayPal noted intent to use its first-party data more effectively. Supporting that is a recent developer conference that outlined some artificial intelligence (AI) features in PayPal's developer toolbox, including AI search and generative AI tools via collaboration with Microsoft.
PayPal was the first major financial institution to launch its stablecoin, a crypto token pegged to the U.S. dollar. It's new, having launched in August 2023, so it's still too early to judge. It allows users to quickly process transactions by converting them through cryptocurrency instead of the traditional settlement process that fiat funds require, which can take days.
Of course, focusing on AI and crypto is not guaranteed to lure new users or spur engagement successfully. Still, these are necessary features for a payment company trying to maintain a modern image.
3. The valuation only needs a spark to explode higher
Understanding PayPal's investment opportunity requires understanding the stock's valuation and what a positive change in sentiment could mean for investment returns. For starters, PayPal trades for less than 13 times this year's estimated earnings. Since its spinoff from eBay, shares have averaged a 47 price-to-earnings ratio. In other words, PayPal is dirt cheap if you look at where it once traded.
That sets the stock up for two types of investment returns: growth-driven and valuation expansion. Analysts expect PayPal to grow earnings by an annual average of 9% over the next three to five years. If the valuation stays the same, investors will enjoy that growth as investment gains. At a PEG ratio of 1.3, the stock is arguably cheap for that expected growth. Therefore, I don't think there's a huge risk of the valuation collapsing much further without something happening to the business.
PYPL PE Ratio (Forward) data by YCharts
The valuation could also expand, resulting in tremendous investment returns if Wall Street were ever to revalue the stock anywhere close to its historical averages. What could cause this? A positive change in sentiment if Wall Street likes what Alex Chriss does with the company over the coming quarters. The stock would have to increase fourfold to trade at that P/E average of 48!
So, investors can consider a range of possible outcomes. At one end, the company stays the same. It's financially stable and chugs along at a high-single-digit growth rate. Conversely, the stock could multiply in value from a successful turnaround. Of course, the outcome could fall somewhere in the middle.
The important part is that there are far more potentially good outcomes than bad ones in this range of possibilities. That's a favorable risk-to-reward situation, which means investors can swing at shares here and potentially do well over the long term.
